Do I Have to Declare Bankruptcy for a Foreclosure?
Declaring bankruptcy once foreclosure proceedings have started is not mandatory for homeowners. Options outside bankruptcy include trying to make a payment arrangement with the lender or participating in foreclosure mediation. Some homeowners may find that filing for bankruptcy is the best route based on their particular circumstances. Becoming informed about their rights will help homeowners make educated decisions about how to deal with the foreclosure process.
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Request New Payment Arrangements
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When the foreclosure notice is received, contact the lender to find out if there are any feasible payment options available. Forbearance would eliminate or reduce the monthly mortgage payments for a few months. New payment terms are created to bring the account current over an extended period of time. The homeowner can also apply for HAMP (Home Affordable Modification Program) or any other loan modification programs currently being offered by the bank. The bank will request documents such as a hardship letter, income verification and tax returns to confirm if the homeowner is eligible for a loan modification. Many loan modification programs offer to lower the interest rate and monthly payment amounts by extending the length of the mortgage term.
Foreclosure Mediation
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In the past, many homeowners had a difficult time communicating with the banks when they wanted to renegotiate mortgage terms. As a result, some states such as Nevada, Connecticut and New Jersey created a Foreclosure Mediation Program. The Notice of Default includes information regarding the foreclosure mediation. The homeowner must file the appropriate paperwork by a set deadline in order to participate in mediation with the bank. Mediation ensures the homeowner has a chance to speak directly with a representative of the bank. It is also an opportunity to determine if the mortgage can be modified in a manner that is acceptable for both parties.
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Bankruptcy
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Filing a bankruptcy case will stop the foreclosure. If a person is behind on his mortgage but wants to retain the house, he can file Chapter 13 bankruptcy. A three- or five-year payment plan is created in a Chapter 13 bankruptcy. The homeowner must be able to pay off the delinquent amount within the time frame of the plan and keep making monthly mortgage payments. If the homeowner does not abide by the terms of the Chapter 13 plan and stops making payments, the bank can request permission from the court to start foreclosure proceedings and repossess the home. The homeowner should consult with a bankruptcy attorney to find out if filing for bankruptcy is the best option for him.
Mortgage Deficiency
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If the lender proceeds with the foreclosure and the house is sold, the homeowner may be responsible for any deficiency between the amount the house was sold for and the remaining balance of the mortgage. The homeowner may also be responsible for the deficiency if the house is sold through a short sale. When the house is surrendered in bankruptcy, any existing deficiency will be discharged by the bankruptcy court. The homeowner would not be responsible for any additional mortgage payments.
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References
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